Oracle’s surge in demand for artificial intelligence should have a positive impact on Digital Realty Trust, according to Deutsche Bank. Analyst Matt Niknam pointed to comments made by Oracle CEO Safra Catz around “explosive AI demand” and “unprecedented” demand for the company’s cloud services. That could “validate the optimism” for Digital Realty, which he noted is considered a more controversial play given elevated leverage and a funding gap that could hamper new construction among real estate-focused data center stocks. “Intelligence may be artificial, but demand is not,” Niknam said in a note to clients on Wednesday. “Most importantly, customer demand is renewed: AI is becoming more tangible and is likely to create a significant driver of data center demand in an already tight market (from a vacancy and power standpoint), where pricing And yields are already trending higher,” Niknam’s $112 price target on Digital Realty suggests the stock could rise about 8% from Tuesday’s close. The stock rose as much as 1.8% on Wednesday, but has underperformed the broader market so far this year, rising 5% year-to-date. As a REIT, Digital Realty also pays a dividend yield of about 4.6%. DLR .SPX YTD mountain Digital Realty vs. S&P 500 Excitement over artificial intelligence has in turn led to increased interest in data centers. However, many data centers have been privatized in recent years, with Niknam pointing out that Digital Realty and Equinix are the only two pure-play data centers left in the market today. The impact of AI is tangible. Niknam noted that Oracle’s investments to date have boosted Oracle’s annual recurring revenue for Digital Realty from $102 million in the first quarter of 2021 to $130 million in the previous quarter. While the company hasn’t done many related leases, demand for Digital Realty’s artificial intelligence products is picking up activity to date, Niknam said. He noted that many AI-related conversations with clients revolve around training, though it’s still seen as a meaningful tailwind that can last for years. AI-related workloads for data center companies should require more capacity and be more compute-intensive, he added. — CNBC’s Michael Bloom contributed to this report.
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